Check, Please! Two Restaurant Stocks to Avoid

by Louis Navellier | September 16, 2013 2:05 pm

Despite an improving jobs picture, Americans are proving reluctant to open their wallets at sit-down dinners. That doesn’t mean they’ve stopped dining out altogether — they’ve just changed their preferences and moved down their dining price points. This dismal reality is reflected in the Portfolio Grader[1] ratings of these restaurant stocks.

Dine Equity (DIN[2]) is the operator of Applebee’s and IHOP and the stock is falling in Portfolio Grader as business conditions worsen. Revenue growth has been nonexistent for the company for some time now, and the company has had a hard time protecting profit margins by reducing costs. Dine Equity has been aggressively using promotional advertising to attempt to bring customers back through the door, and promotions like 2 for $20 are hard on profit margins. The stock was recently downgraded to a “C”[3] — the best of the casual restaurant stocks right now is just a “hold.”

Darden Restaurants (DRI[4]) is one of the nation’s largest casual dining chains, with names like Red Lobster, Olive Garden and LongHorn Steakhouse. The company has been able to achieve total sales growth by opening new locations, but profits have been in decline so far in 2013. Analysts are not expecting much more than low-single-digits earnings growth from the company for several years and have been lowering estimates through 2015. The shares were downgraded back in July and remain a “sell.”[5]

Casual dining is no longer a casual choice for U.S. consumers. They are spending their money in other areas and being cautious when they do eat out. Some stocks are benefitting from this trend — I’ll look at them next.